Hungary Set for Record Low Rates as Matolcsy Takes Over

By Zoltan Simon and Edith Balazs -
Mar 25, 2013

Hungary’s central bank will
probably lower its benchmark interest rate to a record low as
investors focus on the possibility of new President Gyorgy Matolcsy deploying unconventional measures to end a recession.

The Magyar Nemzeti Bank will cut the two-week deposit rate
by a quarter-point to 5 percent tomorrow, easing policy for an
eighth month, according to 25 economists in a Bloomberg survey.
Three expect a cut to 4.75 percent, while one predicts no
change. The decision will be announced at 2 p.m. in Budapest and
the Monetary Council statement will be published at 3 p.m.

Matolcsy scrapped the system of customary press briefings
following rate decisions, central bank spokesman Andras Simon
said in response to questions from Bloomberg. The governor will
only hold media briefings after “strategically important”
decisions, according to Simon.

The forint weakened as Matolcsy’s appointment sparked
speculation over the direction of monetary policy, including the
possible use of reserves for economic stimulus and to reduce the
stock of foreign-currency loans. Investors are watching for
indications of the governor’s self-styled unorthodox policies
being introduced, according to Agata Urbanska, an economist at
HSBC Bank Plc in London.

‘Uneasy’ Investors

Investors “are clearly uneasy,” Urbanska said by e-mail.
“The story will not only be about the rate decision, but also
the first communication from the governor on the policy outlook,
the pace of changes or any new instruments.”

The forint dropped 4.2 percent against the euro in the past
month, the most in the world, according to data compiled by
Bloomberg. The currency traded at 306.65 per euro by 4:15 p.m.
in Budapest, barely changed from the last trading day, after
Cyprus agreed on the terms of a bailout to avert a default and
an exit from the euro area.

Investors expect Hungary’s main rate to drop to at least
4.25 percent in the next six months, forward-rate agreements
indicate.

“The market mistrust from mid-February has to do with the
changing of the guard at the central bank,” Economy Minister
Mihaly Varga said in a Portfolio.hu interview published today,
in response to a question about the forint’s weakness.

The central bank will continue a “cautious” policy, new
MNB Vice President Adam Balog told lawmakers today in
Parliament, adding that the forint’s volatility wasn’t justified
by Hungary’s economic fundamentals. Meeting the inflation goal
is the priority of the new central bank leadership management,
he said.

Matolcsy as economy minister called for the “brave” use
of “unorthodox” monetary policy tools in December in a column
in the weekly Heti Valasz, sending the forint to its weakest in
seven months.

Supporting Policies

The central bank can support the government’s policies and
boost the economy as long as it doesn’t jeopardize price and
financial stability, Matolcsy said after his nomination on March
1. The bank should “review” buying government bonds on the
secondary market, Varga said in the Portfolio.hu interview.

The Cabinet plans to use existing tools “for now” to help
borrowers with foreign-currency mortgages, Varga said, according
to Portfolio.hu financial news website. Hungarians borrowed
predominantly in Swiss francs, taking advantage of lower
interest rates. The weakening of the forint sent repayments
soaring and boosted bad loans.

The government must solve the problem of foreign-currency
loans for households and small businesses or risk remaining
“captive of an exchange rate policy,” Prime Minister Viktor Orban said March 12.

Matolcsy’s Policies

Matolcsy this month consolidated his power as central bank
chief, stripping previously appointed vice presidents of their
strategic responsibilities. He also demoted or fired 12
“mostly” senior-level employees, including economists who had
served at the bank for more than a decade, Origo news website
reported March 21.

Days before taking over the bank, Matolcsy called a central
bank report “immoral” and “unethical,” raising concern about
the independence of the institution under his leadership.

Standard & Poor’s cited the weakening of Hungary’s “policy
framework” and “questions about the independence of oversight
institutions and hence their credibility” in reducing the
country’s credit outlook to negative from stable on March 21.
Hungary is rated BB, the second-highest non-investment grade at
S&P, on par with Portugal and Guatemala.

‘Institutional Risk’

“Previous downgrades used to be generated by erratic
fiscal policy and acute growth underperformance,” Luis Costa, a
London-based strategist at Citigroup Inc., said in a March 22 e-mail. “For the first time in a while rating agencies mention
institutional risk as one major variable in measuring Hungary’s
creditworthiness. I consider this change of outlook as the
opening of one more important dimension in Hungarian risk.”

Policy makers delivered seven consecutive rate cuts since
August, with ruling party-delegated Monetary Council members
outvoting previous Governor Andras Simor and his two deputies
each time by a margin of four to three.

Since Matolcsy’s appointment, the Monetary Council was
expanded by two members to nine, with Gyula Pleschinger, who was
the new central bank chief’s deputy at the Economy Ministry and
Balog, a former deputy state secretary for tax issues in
Matolcsy’s ministry. Of the previous leadership, Ferenc Karvalits’s mandate expires after this month’s rate meeting.

Inflation Slows

The central bank may have more room to cut rates after
consumer prices rose at the slowest pace in almost seven years
in February as the government cut household energy costs. The
inflation rate dropped to 2.8 percent from a year earlier, below
the bank’s 3 percent target, and down from 3.7 percent in
January.

Hungary’s central bank is also scheduled to publish its
inflation report on March 26. Previously, the bank published its
gross domestic product and inflation forecasts an hour after the
rate decision. The bank didn’t answer an e-mail from Bloomberg
News seeking confirmation whether it would continue the
practice.